Road reflected in side-view mirror
If there’s anything that I’ve learned over two decades as an investor, it’s that hindsight is 20/20—and history has a way of repeating itself.
I first met Bruce Felt in late 2006 when he joined a GGV portfolio company, SuccessFactors, as the chief financial officer. Bruce took the company public about a year later—just in time for the Global Financial Crisis (GFC). SuccessFactors weathered that storm, ultimately selling to SAP for $3.4 billion in early 2012.
Given the macro uncertainty of the current environment, I recently asked Bruce to reflect on his experience with plummeting stock prices and layoffs during the GFC:
Bruce is now the CFO of Domo, a cloud-based business management platform that went public in 2018 and has performed well with many quarters in a row of over 20% growth.
Below is a lightly edited and condensed version of our “Founder Real Talk” podcast episode, which covers lessons that might still be relevant for startups today:
Lesson #1: It takes time to convert skeptics into believers
Glenn: “Just a quick reminder for folks who may not be familiar—what did SuccessFactors do, and what was the growth profile of the company leading up to the IPO?”
Bruce: “In the most general sense, SuccessFactors was in the human capital management space with its starting point providing performance reviews in the cloud as the first offering. And that was the beginning of what turned out to be a large portfolio of products… such as goal setting, compensation, and compensation reviews [with] learning analytics on top of all that.”
Glenn: “So you go public. There’s a lot of excitement around the name. But [it was a] pre-SaaS world so concepts like retention rate and net dollar retention were not really well understood by public investors. And the skeptics—there were a lot of skeptics as I recall it—despite the fact that you guys were performing really well as a public company in those first several quarters out of the gate. And my recollection is the stock did not really perform all that well—[it] was not a up-into-the-right kind of story. It was kind of bumping along, maybe even a little down from that first day of trading price for the next year or so on average. Is that right? And what do you think the skeptics were worried about in your business?”
Bruce: “Well the problem with SaaS back then was it was still fresh, new, and certainly not understood. So most investors looked at the income statement, which looked quite terrible… And we were told this by investors, ‘Here we go. It’s the dotcom days again.’ … And I’ll tell you how that played out later—how we actually converted a lot of skeptics over time. But generally what I recall on the stock price, $10 jumps to $13 and works its way up to $15. We do a secondary. It kind of hangs in there and basically performs fine until the financial crisis hit. And then we got hammered: $4 to $5 a share. And it was very depressing.”
Glenn: “I can imagine.”
Bruce: “Well, we were doing nothing wrong, but we were getting slaughtered on the stock side.”
Glenn: “So one thing you did leading up to that, as I recall, was you guys put a line in the sand with investors and said, ‘Hey, look at the cash flow in our business… We’re going to turn cash flow positive by X date.’ Did that quell fears once you hit cash flow positive? Is there anything to learn from that? Companies today face a lot of skeptical investors as well.”
Bruce: “That helped a lot for sure, because once we got the cash flow positive, we were self-sustaining. There was no refinance or financing risk to run the business… But there were still those who said you’re not profitable, you’re not creating value even though we had positive cash flow. So the cynics were still there.”
Lesson #2: Know which macro signals to monitor
Glenn: “Did you see this coming with the GFC? Did it hit you guys like a hammer over the head? Or were you prepared? What actions did you take?”
Bruce: “Here’s the remarkable thing, and I think this is a good lesson for everybody. As we saw it coming—and we saw it coming via the newspaper—we didn’t see it in our business. And we would ask all sales management: ‘Give us the best case and the worst case.’ And generally speaking, the worst case was not so bad. And here is the hard call: We had to ignore them because it looked like there was serious carnage starting to gather at some of the biggest enterprises in the world. And even though the frontline sales force said we’re generally going to be okay, we literally did not believe it was prudent to rely on that. So we made the move and got prepared, assuming that it’s going to be much worse than what the sales guys were calling…
And we were right. So we really made the cut decisions based on the world around us, not by what was happening to our business.
Now having said that, we did go down to zero growth that quarter. Our curse was that bookings all came in the last three days of the quarter. So it was really pretty agonizing that we had to make significant cuts going into late December, our biggest time of the year, when we really didn’t know the answer, but we really paid attention to the world around us more than our own operations.”
Glenn: “If your headcount was X, what percent of the headcount did you end up reducing and roughly what percent of the spend did you take out of the company? And did you do it all kind of all at once?”
Bruce: “It was roughly 25%—we had sell-side analysts write it was 35%, which bothered us because that was too high—and about the same in total spending. What that ended up doing (and I didn’t realize the significance of this until later) is investors told us that drove us to GAAP profitability. And it proved everything we said about the model worked.”
Glenn: “So I want to just pick that apart for a second… I remember when news came out that you guys had done this dramatic cut. And then I assume that news came out before your Q4 was even done and certainly before you announced the results of Q4, the stock dropped to the $4-a-share range at its low. So it’s a pretty big drop and must’ve been brutal on the company. Meanwhile, you had taken out 25% of the heads in the company. And you’ve mentioned how investors actually saw it work. So were they expecting that you would lose your existing customer base pretty rapidly during this time frame? And how did you prove the skeptics wrong?”
Bruce: “Well, I think they appreciated the cuts more than anything. I don’t know that they really knew what to make out of it, but when we said we cut and we’re going to be profitable, that was extremely well-received. They did not yet know how this would literally play out. But we started to paint a picture that we are probably one of the most well-positioned companies to grow from that point on… We got credit for making the cuts. Then we tried to get as much credit as possible by stating very clearly, we were absolutely—from this point on—in a position to grow as soon as the market was allowing it and that we were one of the better bets in all of software. And we didn’t quite get credit then. But that was the beginning of the march to $40 a share.”
Lesson #3: To retain talent, showcase the upside
Glenn: “Question about the mood in the company and how you manage things right when you take a big part of the company out—that’s got to be disruptive. So what was that like? You still have big producers and important people in the company you don’t want to lose who are watching the stock plummet. How do you make sure you retain your best people? And when did you realize, ‘Hey, we can start transitioning back to playing offense again and growing the company?’”
Bruce: “Well, first of all, there was nowhere for anybody to go. We had that working for us. But at the same time, we meant it when we said it: We think we’re extremely well-positioned to really execute well post the cuts. And so if you’re a rep who survived that—you really did see an incredible amount of upside, both in not only the stock but really in what that person could individually go get from customers… They even saw more opportunity with that many more uncovered or available accounts for them to go pursue and get business from.”
Lesson #4: Model worst-case scenarios—and act
Glenn: “What did you learn from that time in your life, and what might be relevant for others today? Anything you’d point to that you think history can repeat itself and people ought to know from your experience?”
Bruce: “I pulled out that playbook two weeks ago because could it happen again? Maybe so. Actually, I’ll take that back. I already pulled out the playbook and used it at Domo when COVID hit… What would happen if our top line followed the same trajectory that we saw in the financial crisis? We modeled that out. We were prepared to take action as if that were to happen. And preemptively before anything happened to our business, we didn’t go quite as deep. We took 12% out of demos. And that actually put us not GAAP profitable, but it put us [at] cash flow breakeven for the first time ever at Domo. And it was an eerily, eerily similar pattern. So we went public at $21, goes up to the thirties, bounce around at $15, and back in the twenties. Then this crisis happens. We’re at $8. Now fast forward to four or five, six years later—we’re at $95.”
Glenn: “Wow.”
Bruce: “So I pulled out the same playbook and really the stock did the exact same thing. And now we’re about to hit maybe financial crisis No. 2 in my life at Domo. And we’re doing the same thing. We’re running the scenarios. If this, then that. We’re not reading the newspapers, and we’re watching the leading indicator, lead gen, top-of-the-funnel metrics like a hawk. We’re asking every rep: ‘You hearing anything about macro in your accounts?’ So if anything, we’re even more aware and more sensitive. Yeah, it’s already lined up—we already have the whole management team [thinking]: If this, then that. We’re locked and loaded already.”
Glenn: “It’s a great history lesson, and history, as we know, repeats itself. So I really, really appreciate you sharing your thoughts with us and experiences from this moment.”
Read more: How to Stand the Test of Time as a Startup
Listen to more “Founder Real Talk” episodes
I was a board observer and led GGV’s investment in SuccessFactors in 2006 and 2007, where I helped advise the CEO and CFO through the IPO process and into life as a public company.